Oil and the Real US Trade Deficit

The monthly trade data was reported this morning and you will see press reports about the nominal trade deficit. But I like to look at the real trade data as it gives a better feel for the economic impact of trade. The real trade deficit is improving and the balance in February was $44,148 million ( 2005 $) as compared to $48,294 million ( 2005 $) in December. I am
comparing the February to December because in the real GDP accounts they compare the change over the quarter versus the quarterly average for most of the economic series in the accounts.
This looks like a nice gain and implies that trade will make a nice contribution to first quarter growth.

But to understand what is happening to the trade data you need to look below the surface at some of the details. We are really seeing a structural change in the US energy environment because of falling domestic demand and expanded output from fracking. For the first time since oil became a major issue in the 1970’s we are starting to see a real possibility that over the next decade the US could really achieve energy self sufficiency. Drill, Baby, Drill is no longer just some silly political
campaign slogan. The US probably will not actually achieve energy independence, but we should reach the point where we only import energy from other North American sources. The US can
eliminate its direct dependence on Mideast oil. It is already starting to happen and on a net basis US real oil imports have been cut almost in half from their 2005 peak.

US petroleum exports, or reexports are now equivalent to roughly a third of gross imports. Part of this is due to the current transportation bottlenecks that have created a surplus of oil in the interior and lead to West Texas Intermediate oil trading about $20/bbl cheaper than Brent crude.
This is giving the Gulf Coast refiners a major competitive edge in world markets for refined oil products. But is also becoming a major political issue over the Keystone XL Pipeline. The pipeline would allow Canadian Tar Sands oil to flow to the Gulf Coast refiners. Of course, oil is fungible and if Canada exports their oil from their own ports it would have the same impact on world oil supply and demand and oil prices would be about the same as if the Keystone pipeline is built. The pipeline would benefit the US, but most of the political claims are grossly exgerated.

Oil is now making a major contribution to the improving US trade deficit, but even without oil the trade balance is improving.

Even US non-petroleum exports have been surging. But much of the surge is just the snap back
from the plunge in trade during the Great Recession. Real exports growth of non-petroleum products is slowing rapidly as the year over year growth rate has slowed to about 5% as compared to a peak rate of almost 20%. in 2010.

Real non-petroleum imports are showing a similar trend where growth has slowed to about 5%
as compared to a peak growth rate of 30% in 2010. Of course, imports are larger than exports so if they both grow at the same rate the trade deficit would widen.

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